Exchange Rate Forecasts 2016, 2017: Lloyds Bank

Lloyds Bank’s August edition of their International Financial Outlook is now out. We bring you the foreign exchange forecasts contained within.

Highlights of the Lloyds Bank IFO:

1) In the wake of the UK referendum result, Lloyds see UK interest rates lower and staying lower for much longer. Bank Rate is predicted to fall to just 0.1% in November and remain at that level for at least the next two years. Analysts believe negative policy interest rates are still highly unlikely.

2) Lloyds maintain expectation that US policy interest rates will rise in December. Given heightened global uncertainty and more mixed US data, they no longer expect a rise in September. However, Fed Chair Yellen’s comments at the Jackson Hole Symposium and August payrolls will be watched closely.

3) Key policy rates in the euro area and Japan are forecast to remain unchanged, with the primary focus switching to the implementation and structure of other forms of stimulus.

4) Given the sharp falls in recent weeks and more benign policy outlook, Lloyds have lowered their global government bond yield forecasts. Analysts now expect only a modest rise in 10-yr rates over the next twelve months, to 1.8% in the US and 0.7% in the UK.

5) Lloyds have revised down their forecast for the Sterling exchange rate complex. At year end, they forecast GBP/USD at 1.28 and GBP/EUR at 1.19. Their bearish bias on the yen has been reassessed in the context of lower global interest rates and a less aggressive BoJ.

6) EM currencies have been the best performers against the USD, led by the SA rand and Brazilian real. While they remain broadly optimistic, some pullback appears increasingly justified.